FIG-2013.3.31-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended March 31, 2013
or
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the transition period from               to              
Commission File Number: 001-33294
Fortress Investment Group LLC
(Exact name of registrant as specified in its charter) 
Delaware
 
20-5837959
(State or other jurisdiction of incorporation
 
(I.R.S. Employer Identification No.)
or organization)
 
 
1345 Avenue of the Americas, New York, NY
 
10105
(Address of principal executive offices)
 
(Zip Code)
(212) 798-6100
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý  No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ý  Yes  No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
 
Accelerated filer x



Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.
Class A Shares: 236,681,342 outstanding as of April 26, 2013.
Class B Shares: 249,534,372 outstanding as of April 26, 2013.



FORTRESS INVESTMENT GROUP LLC
FORM 10-Q
INDEX
 
 
PAGE
 
 



 



 
Consolidated Balance Sheets as of March 31, 2013 (unaudited) and December 31, 2012



 
Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2013 and 2012



 
Consolidated Statements of Comprehensive Income (unaudited) for the three months ended March 31, 2013 and 2012



 
Consolidated Statement of Changes in Equity (unaudited) for the three months ended March 31, 2013



 
Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2013 and 2012



 
 
 
 
 
 
 
 
 
 
 
 
 



 
 
 
 
 
 
 
 






 
 
 


 


 


 


 


 


 


 


 


Table of Contents

Set forth below is information about certain terms used in this Quarterly Report on Form 10-Q:
 
''Management Fee Paying Assets Under Management,” or “AUM,” refers to the management fee paying assets we manage, including, as applicable, capital we have the right to call from our investors pursuant to their capital commitments to various funds. Our AUM equals the sum of:

(i)
the capital commitments or invested capital (or NAV, if lower) of our private equity funds and credit PE funds,     depending on which measure management fees are being calculated upon at a given point in time, which in connection with private equity funds raised after March 2006 includes the mark-to-market value of public securities held within the funds,
(ii)
the contributed capital of our publicly traded alternative investment vehicles, which we refer to as our “Castles,”
(iii)
the net asset value, or “NAV,” of our hedge funds, including the Value Recovery Funds and certain advisory engagements which pay fees based on realizations (and on certain managed assets and, in some cases, a fixed fee); and
(iv)
the NAV or fair value of our managed accounts, to the extent management fees are charged.

For each of the above, the amounts exclude assets under management for which we charge either no or nominal fees, generally related to our principal investments in funds as well as investments in funds by our principals, directors and employees.

Our calculation of AUM may differ from the calculations of other asset managers and, as a result, this measure may not be comparable to similar measures presented by other asset managers. Our definition of AUM is not based on any definition of assets under management contained in our operating agreement or in any of our Fortress Fund management agreements. Finally, our calculation of AUM differs from the manner in which our affiliates registered with the United States Securities and Exchange Commission report “Regulatory Assets Under Management” on Form ADV and Form PF in various ways.  Significantly, Regulatory Assets Under Management, unlike Management Fee Paying Assets Under Management, is not reduced by liabilities or indebtedness associated with assets under management and it includes assets under management and uncalled capital for which Fortress receives no compensation.

“Fortress,” “we,” “us,” “our,” the “company” and the “public company” refer, collectively, to Fortress Investment Group LLC and its subsidiaries, including the Fortress Operating Group and all of its subsidiaries.

“Fortress Funds” and “our funds” refers to the private investment funds, alternative asset companies and related managed accounts that we manage. The Fortress Macro Fund is our flagship liquid hedge fund and the Drawbridge Special Opportunities Fund is our flagship credit hedge fund.

“Fortress Operating Group” or “FOG” refers to the limited partnerships and their subsidiaries through which we conduct our business and hold our principal investments. The public company controls the Fortress Operating Group through wholly owned subsidiaries that serve as the general partner of each FOG entity.

Economic interests in each FOG entity are represented by Class A Common Units and Class B Common Units. Class A Common Units are (indirectly) owned by the public company, and Class B Common Units are owned by the principals (defined below) and, from time to time, one senior employee who owned securities convertible into Class B Common Units.

The number of outstanding Class A Common Units equals the number of outstanding Class A shares of the public company. The number of outstanding Class B Common Units equals the number of outstanding Class B shares of the public company.

Fortress Operating Group units” or “FOGUs” is the term we use to refer to the aggregate of one limited partner interest (either a Class A Common Unit or a Class B Common Unit, as applicable) in each FOG entity. One FOGU together with one Class B share is convertible into one Class A share. A surrendered Class B Common Unit automatically converts into a Class A Common Unit.

principals” or “Principals” refers to Peter Briger, Wesley Edens, Randal Nardone and Michael Novogratz, collectively, as well as Robert Kauffman until his retirement in December 2012. The principals control the public company through their ownership of the public company's Class B shares (together with, from time to time, a senior employee who owned securities convertible into Class B shares). The Class B shares and the Class A shares are each entitled to one vote per share, and the number of Class B shares outstanding represents a majority of the aggregate number of Class B shares and Class A shares outstanding. The Class B shares do not represent an economic interest in the public company and therefore are not entitled to any dividends. The principals own their economic interest in the public company through their direct ownership of FOGUs.



Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under Part II, Item 1A, “Risk Factors,” Part I, Item 2, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” Part I, Item 3, “Quantitative and Qualitative Disclosures About Market Risk” and elsewhere in this Quarterly Report on Form 10-Q may contain forward-looking statements which reflect our current views with respect to, among other things, future events and financial performance. Readers can identify these forward-looking statements by the use of forward-looking words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of those words or other comparable words. Any forward-looking statements contained in this report are based upon the historical performance of us and our subsidiaries and on our current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business prospects, growth strategy and liquidity. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from those indicated in these statements. Accordingly, you should not place undue reliance on any forward-looking statements. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report. We do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

SPECIAL NOTE REGARDING EXHIBITS

In reviewing the agreements included as exhibits to this Quarterly Report on Form 10‑Q, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements.  The agreements contain representations and warranties by each of the parties to the applicable agreement.  These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;

have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;

may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and

were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time.  Additional information about the Company may be found elsewhere in this Quarterly Report on Form 10‑Q and the Company's other public filings, which are available without charge through the SEC's website at http://www.sec.gov.
The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this report not misleading.


 



Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FORTRESS INVESTMENT GROUP LLC
 
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
 
 
March 31, 2013
(Unaudited)
 
December 31, 2012
Assets
 

 
 

Cash and cash equivalents
$
245,957

 
$
104,242

Due from affiliates
144,122

 
280,557

Investments
1,314,271

 
1,249,761

Deferred tax asset
386,788

 
402,135

Other assets
119,651

 
124,798

 
$
2,210,789

 
$
2,161,493

 
 
 
 
Liabilities and Equity
 

 
 

 
 
 
 
Liabilities
 

 
 

Accrued compensation and benefits
$
134,858

 
$
146,911

Due to affiliates
319,574

 
357,407

Deferred incentive income
251,827

 
231,846

Debt obligations payable
109,453

 
149,453

Other liabilities
100,023

 
59,226

 
915,735

 
944,843

 
 
 
 
Commitments and Contingencies


 


 
 
 
 
Equity
 

 
 

Class A shares, no par value, 1,000,000,000 shares authorized, 236,681,342
 
 
 
and 218,286,342 shares issued and outstanding at March 31, 2013 and December 31, 2012 respectively

 

Class B shares, no par value, 750,000,000 shares authorized, 249,534,372
 
 
 
and 249,534,372 shares issued and outstanding at March 31, 2013 and December 31, 2012 respectively

 

Paid-in capital
2,138,810

 
2,119,102

Retained earnings (accumulated deficit)
(1,472,249
)
 
(1,486,578
)
Treasury shares (2,082,684 Class A shares held by subsidiary at December 31, 2012)

 
(3,419
)
Accumulated other comprehensive income (loss)
(1,993
)
 
(2,634
)
Total Fortress shareholders’ equity
664,568

 
626,471

Principals’ and others’ interests in equity of consolidated subsidiaries
630,486

 
590,179

Total equity
1,295,054

 
1,216,650

 
$
2,210,789

 
$
2,161,493

 
See notes to consolidated financial statements.



1

Table of Contents

FORTRESS INVESTMENT GROUP LLC
 
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(dollars in thousands)
 
 
Three Months Ended March 31,
 
2013
 
2012
Revenues
 

 
 

Management fees: affiliates
$
143,602

 
$
106,295

Management fees: non-affiliates
14,815

 
11,389

Incentive income: affiliates
31,357

 
8,802

Incentive income: non-affiliates
1,429

 
307

Expense reimbursements primarily from affiliates
50,568

 
43,602

Other revenues (affiliate portion disclosed in Note 6)
2,584

 
1,263

 
244,355

 
171,658

Expenses
 

 
 

Interest expense
2,295

 
4,367

Compensation and benefits
181,079

 
183,379

General, administrative and other
33,998

 
29,666

Depreciation and amortization
3,239

 
3,478

 
220,611

 
220,890

Other Income (Loss)
 

 
 

Gains (losses) (affiliate portion disclosed in Note 3)
41,275

 
24,622

Tax receivable agreement liability adjustment
(7,739
)
 
(6,935
)
Earnings (losses) from equity method investees
36,302

 
35,240

 
69,838

 
52,927

Income (Loss) Before Income Taxes
93,582

 
3,695

Income tax benefit (expense)
(26,276
)
 
(27,842
)
Net Income (Loss)
$
67,306

 
$
(24,147
)
Principals’ and Others’ Interests in Income (Loss) of Consolidated Subsidiaries
$
52,977

 
$
5,393

Net Income (Loss) Attributable to Class A Shareholders
$
14,329

 
$
(29,540
)
Dividends declared per Class A share
$
0.06

 
$
0.05

 
 
 
 

Earnings (Loss) Per Class A share
 

 
-0.15

Net income (loss) per Class A share, basic
$
0.06

 
$
(0.15
)
Net income (loss) per Class A share, diluted
$
0.05

 
$
(0.16
)
Weighted average number of Class A shares outstanding, basic
227,287,102

 
200,009,820

Weighted average number of Class A shares outstanding, diluted
496,294,600

 
515,803,383

 
See notes to consolidated financial statements.


2

Table of Contents

FORTRESS INVESTMENT GROUP LLC
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(dollars in thousands)
 
 
Three Months Ended March 31,
 
2013
 
2012
Comprehensive income (loss) (net of tax)
 

 
 

Net income (loss)
$
67,306

 
$
(24,147
)
Foreign currency translation
(2,856
)
 
(917
)
Comprehensive income (loss) from equity method investees
4,225

 
(668
)
Total comprehensive income (loss)
$
68,675

 
$
(25,732
)
Comprehensive income (loss) attributable to principals’ and others’ interests
$
53,834

 
$
4,481

Comprehensive income (loss) attributable to Class A shareholders
$
14,841

 
$
(30,213
)

























See notes to consolidated financial statements.


3

Table of Contents

FORTRESS INVESTMENT GROUP LLC
 
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2013
(dollars in thousands)
 
 
Class A Shares
 
Class B Shares
 
Paid-In Capital
 
Retained
Earnings
(Accumulated
Deficit)
 
Treasury Shares
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total Fortress
Shareholders’
Equity
 
Principals’
and Others’
Interests in
Equity of
Consolidated
Subsidiaries
 
Total Equity
Equity - December 31, 2012
218,286,342

 
249,534,372

 
$
2,119,102

 
$
(1,486,578
)
 
$
(3,419
)
 
$
(2,634
)
 
$
626,471

 
$
590,179

 
$
1,216,650

Contributions from principals’ and others’ interests in
equity

 

 

 

 

 

 

 
24,188

 
24,188

Distributions to principals’ and others’ interests in equity
(net of tax)

 

 
(112
)
 

 

 

 
(112
)
 
(25,996
)
 
(26,108
)
Dividends declared

 

 
(13,364
)
 

 

 

 
(13,364
)
 
66

 
(13,298
)
Dividend equivalents accrued in connection with equity-
based compensation (net of tax)

 

 
(195
)
 

 

 

 
(195
)
 
(313
)
 
(508
)
Conversion of Class B shares to Class A shares
10,333,334

 
(10,333,334
)
 
10,143

 

 

 

 
10,143

 
(10,143
)
 

Net deferred tax effects resulting from acquisition and
exchange of Fortress Operating Group units

 

 
11,632

 

 

 

 
11,632

 

 
11,632

Director restricted share grant
47,931

 

 
104

 

 

 

 
104

 
116

 
220

Capital increase related to equity-based compensation, net
5,931,051

 
10,333,334

 
6,890

 

 

 

 
6,890

 
7,718

 
14,608

Dilution impact of Class A share issuance

 

 
9,049

 

 
(15
)
 
129

 
9,163

 
(9,163
)
 

Reissuance of treasury stock
2,082,684

 

 
(4,439
)
 

 
3,434

 

 
(1,005
)
 

 
(1,005
)
Comprehensive income (loss) (net of tax)
 

 
 

 
 

 
 

 
 
 
 

 
 

 
 

 
 

Net income (loss)

 

 

 
14,329

 

 

 
14,329

 
52,977

 
67,306

Foreign currency translation

 

 

 

 

 
(1,019
)
 
(1,019
)
 
(1,837
)
 
(2,856
)
Comprehensive income (loss) from equity method
investees

 

 

 

 

 
1,531

 
1,531

 
2,694

 
4,225

Total comprehensive income (loss)
 

 
 

 
 

 
 

 
 
 
 

 
14,841

 
53,834

 
68,675

Equity - March 31, 2013
236,681,342

 
249,534,372

 
$
2,138,810

 
$
(1,472,249
)
 
$

 
$
(1,993
)
 
$
664,568

 
$
630,486

 
$
1,295,054

 
See notes to consolidated financial statements.


4

Table of Contents

FORTRESS INVESTMENT GROUP LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands)
 
Three Months Ended March 31,
 
2013
 
2012
Cash Flows From Operating Activities
 

 
 

Net income (loss)
$
67,306

 
$
(24,147
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities


 
 

Depreciation and amortization
3,239

 
3,478

Other amortization and accretion (included in interest expense)
288

 
335

(Earnings) losses from equity method investees
(36,302
)
 
(35,240
)
Distributions of earnings from equity method investees
18,411

 
11,595

(Gains) losses
(41,275
)
 
(24,622
)
Deferred incentive income
(26,795
)
 
(8,743
)
Deferred tax (benefit) expense
36,207

 
34,654

Adjustment of estimated forfeited non-cash compensation
12

 
(1,514
)
Options received from affiliates
(26,374
)
 

Tax receivable agreement liability adjustment
7,739

 
6,935

Equity-based compensation
9,597

 
61,035

Options in affiliates granted to employees
6,356

 

Allowance for doubtful accounts
73

 
186

Cash flows due to changes in
 
 
 
Due from affiliates
(15,226
)
 
(23,628
)
Other assets
11,192

 
(665
)
Accrued compensation and benefits
5,463

 
(145,931
)
Due to affiliates
(14,593
)
 
2,518

Deferred incentive income
48,323

 
12,333

Other liabilities
32,007

 
28,178

Net cash provided by (used in) operating activities
85,648

 
(103,243
)
Cash Flows From Investing Activities
 
 
 
Contributions to equity method investees
(237
)
 
(6,868
)
Distributions of capital from equity method investees
167,083

 
109,039

Purchase of fixed assets
(2,334
)
 
(3,568
)
Net cash provided by (used in) investing activities
164,512

 
98,603

Cash Flows From Financing Activities
 
 
 
Repayments of debt obligations
(40,000
)
 
(8,750
)
Payment of deferred financing costs
(2,054
)
 

Dividends and dividend equivalents paid
(13,907
)
 
(10,315
)
Principals’ and others’ interests in equity of consolidated subsidiaries - contributions
320

 
19

Principals’ and others’ interests in equity of consolidated subsidiaries - distributions
(52,804
)
 
(60,891
)
Net cash provided by (used in) financing activities
(108,445
)
 
(79,937
)
Net Increase (Decrease) in Cash and Cash Equivalents
141,715

 
(84,577
)
Cash and Cash Equivalents, Beginning of Period
104,242

 
333,166

Cash and Cash Equivalents, End of Period
$
245,957

 
$
248,589


Continued on next page.


5

Table of Contents


FORTRESS INVESTMENT GROUP LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands)

 
Three Months Ended March 31,
 
2013
 
2012
Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid during the period for interest
$
1,658

 
$
3,903

Cash paid during the period for income taxes
$
1,309

 
$
2,000

Supplemental Schedule of Non-cash Investing and Financing Activities
 
 
 
Employee compensation invested directly in subsidiaries
$
23,872

 
$
8,353

Investments of receivable amounts into Fortress Funds
$
162,647

 
$
71,921

Dividends, dividend equivalents and Fortress Operating Group unit distributions declared but not yet paid
$
3,611

 
$
775








 
See notes to consolidated financial statements.

6

Table of Contents
  
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2013
(dollars in tables in thousands, except share data)


1. ORGANIZATION AND BASIS OF PRESENTATION
 
Fortress Investment Group LLC (the “Registrant,” or, together with its subsidiaries, “Fortress”) is a leading, highly diversified global investment management firm whose predecessor was founded in 1998. Its primary business is to sponsor the formation of, and provide investment management services for, various investment funds and companies, including related managed accounts (collectively, the “Fortress Funds”). Fortress generally makes principal investments in these funds.
 
Fortress has three primary sources of income from the Fortress Funds: management fees, incentive income, and investment income on its principal investments in the funds. The Fortress Funds fall into the following business segments in which Fortress operates:

1)
Private equity:
a)    General buyout and sector-specific funds focused on control-oriented investments in cash flow generating assets and asset-based businesses in North America, Western Europe and Asia; and
b)    Publicly traded permanent capital vehicles, which Fortress refers to as “Castles,” that invest in a wide variety of real estate related assets including securities, loans, real estate properties and mortgage servicing rights.

2)
Liquid hedge funds that invest globally in fixed income, currency, equity and commodity markets, and related derivatives to capitalize on imbalances in the financial markets. In addition, this segment includes an endowment style fund, which invests in Fortress Funds, funds managed by external managers, and direct investments; and a fund that seeks to generate returns by executing a positively convex investment strategy.

3)
Credit funds:
a)
Credit hedge funds, which make highly diversified investments in direct lending, corporate debt and securities, portfolios and orphaned assets, real estate and structured finance, on a global basis and throughout the capital structure, with a value orientation, as well as non-Fortress originated funds for which Fortress has been retained as manager as part of an advisory business; and
b)            Credit private equity (“PE”) funds which are comprised of a family of “credit opportunities” funds focused on investing in distressed and undervalued assets, a family of ''long dated value'' funds focused on investing in undervalued assets with limited current cash flows and long investment horizons, a family of “real assets” funds focused on investing in tangible and intangible assets in four principal categories (real estate, capital assets, natural resources and intellectual property), a family of Asia funds, including Japan real estate funds and an Asian investor based global opportunities fund, and a family of real estate opportunities funds, as well as certain sector-specific funds with narrower investment mandates tailored for the applicable sector.

4)
Logan Circle Partners, L.P. (“Logan Circle”), which represents Fortress's traditional asset management business providing institutional clients actively managed investment solutions across a broad spectrum of fixed income and growth equity strategies. Logan Circle's core fixed income products cover the breadth of the maturity and risk spectrums, including short, intermediate and long duration, core/core plus, investment grade credit, high yield and emerging market debt. In April 2013, Logan Circle launched a growth equities investment business focused on investing and managing concentrated portfolios of publicly traded U.S. equities.

5)
Principal investments in the above described funds.


 

7

Table of Contents
  
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2013
(dollars in tables in thousands, except share data)


FINANCIAL STATEMENT GUIDE
Selected Financial Statement Captions
 
Note Reference
 
Explanation
 
 
 
 
 
Balance Sheet
 
 
 
 
 
 
 
 
 
Due from Affiliates
 
6
 
Generally, management fees, expense reimbursements and incentive income due from Fortress Funds.
 
 
 
 
 
Investments
 
3
 
Primarily the carrying value of Fortress’s principal investments in the Fortress Funds.
 
 
 
 
 
Deferred Tax Asset
 
5
 
Relates to potential future tax benefits.
 
 
 
 
 
Due to Affiliates
 
6
 
Generally, amounts due to the Principals related to their interests in Fortress Operating Group and the tax receivable agreement.
 
 
 
 
 
Deferred Incentive Income
 
2
 
Incentive income already received from certain Fortress Funds based on past performance, which is subject to contingent repayment based on future performance.
 
 
 
 
 
Debt Obligations Payable
 
4
 
The balance outstanding on the credit agreement and promissory note.
 
 
 
 
 
Statement of Operations
 
 
 
 
 
 
 
 
 
Management Fees: Affiliates
 
2
 
Fees earned for managing Fortress Funds, generally determined based on the size of such funds.
 
 
 
 
 
Management Fees: Non-Affiliates
 
2
 
Fees earned from managed accounts and our traditional fixed income asset management business, generally determined based on the amount managed.
 
 
 
 
 
Incentive Income: Affiliates
 
2
 
Income earned from Fortress Funds, based on the performance of such funds.
 
 
 
 
 
Incentive Income: Non- Affiliates
 
2
 
Income earned from managed accounts, based on the performance of such accounts.
 
 
 
 
 
Compensation and Benefits
 
7
 
Includes equity-based, profit-sharing and other compensation to employees.
 
 
 
 
 
Gains (Losses)
 
3
 
The result of asset dispositions or changes in the fair value of investments or other financial instruments which are marked to market (including the Castles and GAGFAH).
 
 
 
 
 
Tax Receivable Agreement Liability Adjustment
 
5
 
Represents a change in the amount due to the Principals under the tax receivable agreement.
 
 
 
 
 
Earnings (Losses) from Equity Method Investees
 
3
 
Fortress’s share of the net earnings (losses) of the Fortress Funds resulting from its principal investments.
 
 
 
 
 
Income Tax Benefit (Expense)
 
5
 
The net tax result related to the current period. Certain of Fortress’s revenues are not subject to taxes because they do not flow through taxable entities. Furthermore, Fortress has significant permanent differences between its GAAP and tax basis earnings.


8

Table of Contents
  
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2013
(dollars in tables in thousands, except share data)

Selected Financial Statement Captions
 
Note Reference
 
Explanation
 
 
 
 
 
Principals’ and Others’ Interests in (Income) Loss of Consolidated Subsidiaries
 
6
 
Primarily the Principals’ and employees’ share of Fortress’s earnings based on their ownership interests in subsidiaries, including Fortress Operating Group.
 
 
 
 
 
Earnings Per Share
 
8
 
GAAP earnings per Class A share based on Fortress’s capital structure, which is comprised of outstanding and unvested equity interests, including interests which participate in Fortress’s earnings, at both the Fortress and subsidiary levels.
 
 
 
 
 
Other
 
 
 
 
 
 
 
 
 
Distributions
 
8
 
A summary of dividends and distributions, and the related outstanding shares and units, is provided.
 
 
 
 
 
Distributable Earnings
 
10
 
A presentation of our financial performance by segment (fund type) is provided, on the basis of the operating performance measure used by Fortress’s management committee.

The FASB has recently issued or discussed a number of proposed standards on such topics as consolidation, the definition of an investment company, financial statement presentation, revenue recognition, leases, financial instruments, hedging, and contingencies. Some of the proposed changes are significant and could have a material impact on Fortress’s financial reporting. Fortress has not yet fully evaluated the potential impact of these proposals, but will make such an evaluation as the standards are finalized.
 
The accompanying consolidated financial statements and related notes of Fortress have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under U.S. generally accepted accounting principles have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of Fortress’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with Fortress’s consolidated financial statements for the year ended December 31, 2012 and notes thereto included in Fortress’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2013.  Capitalized terms used herein, and not otherwise defined, are defined in Fortress’s consolidated financial statements for the year ended December 31, 2012.
 
2. MANAGEMENT AGREEMENTS AND FORTRESS FUNDS
 
Fortress has two principal sources of income from its agreements with the Fortress Funds: contractual management fees, which are generally based on a percentage of fee paying assets under management, and related incentive income, which is generally based on a percentage of profits subject to the achievement of performance criteria. Substantially all of Fortress's net assets, after deducting the portion attributable to principals' and others' interests, are a result of principal investments in, or receivables from, these funds. The terms of agreements between Fortress and the Fortress Funds are generally determined in connection with third party fund investors.

The Fortress Funds are divided into segments and Fortress’s agreements with each are detailed below.
 

9

Table of Contents
  
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2013
(dollars in tables in thousands, except share data)

Management Fees, Incentive Income and Related Profit Sharing Expense

Fortress recognized management fees and incentive income as follows:

 
 
Three Months Ended March 31,
 
2013
 
2012
Private Equity
 
 
  

Private Equity Funds
  
 
  

Management fees: affil.
$
32,784

 
$
29,587

Management fees: non-affil.
104

 
71

       Incentive income: affil.
10,455

 
1,107

 
 
 
 
Castles
  
 
  

Management fees: affil.
16,688

 
12,149

Management fees, options: affil.
26,374

 

Management fees: non-affil.
1,270

 
2,552

Incentive income: affil.

 

 
 
 
 
Liquid Hedge Funds
  
 
  

Management fees: affil.
17,522

 
17,212

Management fees: non-affil.
5,501

 
2,955

Incentive income: affil.
1,787

 
62

Incentive income: non-affil.
1,053

 
48

 
 
 
 
Credit Funds
  
 
  

Credit Hedge Funds
  
 
  

Management fees: affil.
24,530

 
25,505

Management fees: non-affil.
31

 
125

Incentive income: affil.
3,151

 
257

Incentive income: non-affil.

 

 
 
 
 
Credit PE Funds
  
 
  

Management fees: affil.
25,156

 
21,842

Management fees: non-affil.
35

 
36

Incentive income: affil.
15,964

 
7,376

Incentive income: non-affil.
376

 
259

 
 
 
 
Logan Circle
  
 
  

Management fees: affil.
548

 

Management fees: non-affil.
7,874

 
5,650

 
 
 
 
Total
  
 
  

Management fees: affil.
$
143,602

 
$
106,295

Management fees: non-affil.
$
14,815

 
$
11,389

Incentive income: affil. (A)
$
31,357

 
$
8,802

Incentive income: non-affil.
$
1,429

 
$
307


(A) See “Deferred Incentive Income” below.

10

Table of Contents
  
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2013
(dollars in tables in thousands, except share data)

 Deferred Incentive Income
 
Incentive income from certain Fortress Funds, primarily private equity funds and credit PE funds, is received when such funds realize profits, based on the related agreements. However, this incentive income is subject to contingent repayment by Fortress to the funds until certain overall fund performance criteria are met. Accordingly, Fortress does not recognize this incentive income as revenue until the related contingencies are resolved. Until such time, this incentive income is recorded on the balance sheet as deferred incentive income and is included as “distributed-unrecognized” deferred incentive income in the table below. Incentive income from such funds, based on their net asset value, which has not yet been received is not recorded on the balance sheet and is included as “undistributed” deferred incentive income in the table below.

Incentive income from certain Fortress Funds is earned based on achieving annual performance criteria. Accordingly, this incentive income is recorded as revenue at year end (in the fourth quarter of each year), is generally received subsequent to year end, and has not been recognized for these funds during the three months ended March 31, 2013 and 2012. If the amount of incentive income contingent on achieving annual performance criteria was not contingent on the results of the subsequent quarters, $59.4 million and $35.9 million of additional incentive income from affiliates would have been recognized during the three months ended March 31, 2013 and 2012, respectively. Incentive income based on achieving annual performance criteria that has not yet been recognized, if any, is not recorded on the balance sheet and is included as “undistributed” deferred incentive income in the table below.
 
During the three months ended March 31, 2013 and 2012, Fortress recognized $16.0 million and $7.4 million, respectively, of incentive income distributions from its credit PE funds which represented “tax distributions.” These tax distributions are not subject to clawback and reflect a cash amount approximately equal to the amount expected to be paid out by Fortress for taxes or tax-related distributions on the allocated income from such funds.
 
Deferred incentive income from the Fortress Funds was comprised of the following, on an inception-to-date basis. This does not include any amounts related to third party funds, receipts from which are reflected as Other Liabilities until all contingencies are resolved.
 
 
Distributed-Gross
 
Distributed-Recognized (A)
 
Distributed-Unrecognized (B)
 
Undistributed net of intrinsic clawback (C) (D)
Deferred incentive income as of December 31, 2012
$
894,278

 
$
(662,432
)
 
$
231,846

 
$
527,432

Fortress Funds which matured (no longer subject
to clawback)
(2,180
)
 
2,180

 
N/A

 
N/A

Share of income (loss) of Fortress Funds
 N/A

 
 N/A

 
 N/A

 
150,972

Distribution of private equity incentive income
48,364

 
 N/A

 
48,364

 
(48,364
)
Recognition of previously deferred incentive income
 N/A

 
(26,795
)
 
(26,795
)
 
 N/A

Changes in foreign exchange rates
(1,588
)
 

 
(1,588
)
 
 N/A

Deferred incentive income as of March 31, 2013
$
938,874

 
$
(687,047
)
 
$
251,827

 
$
630,040

Deferred incentive income including Fortress Funds
which matured
$
992,530

 
$
(740,703
)
 
 
 
 

(A)
All related contingencies have been resolved.
(B)
Reflected on the balance sheet.
(C)
At March 31, 2013, the net undistributed incentive income is comprised of $716.7 million of gross undistributed incentive income, net of $86.7 million of intrinsic clawback (see next page). The net undistributed incentive income represents the amount that would be received by Fortress from the related funds if such funds were liquidated on March 31, 2013 at their net asset values.
(D)
From inception to March 31, 2013, Fortress has paid $403.5 million of compensation expense under its employee profit sharing arrangements (Note 7) in connection with distributed incentive income, of which $27.9 million has not been expensed because management has determined that it is not probable of being incurred as an expense and will be recovered from the related individuals. If the $716.7 million of gross undistributed incentive income were realized, Fortress would recognize and pay an additional $336.7 million of compensation expense.
 


11

Table of Contents
  
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2013
(dollars in tables in thousands, except share data)

The following tables summarize information with respect to the Fortress Funds, other than the Castles, and their related incentive income thresholds as of March 31, 2013:

 Fund (Vintage) (A)
 
 Maturity Date (B)
 
 Inception to Date
Capital Invested
 
 Inception to Date Distributions (C)
 
 Net Asset Value (“NAV”)
 
 NAV Surplus (Deficit) (D)
 
 Current Preferred Return Threshold (E)
 
 Gain to Cross Incentive Income Threshold (F)
 
 Undistributed Incentive Income (G)
 
 Distributed Incentive Income (H)
 
 Distributed Incentive Income Subject to Clawback (I)
 
 Gross Intrinsic Clawback (J)
 
 Net Intrinsic Clawback (J)
Private Equity Funds
 
 
 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

NIH (1998)
 
Indefinite
 
$
415,574

 
$
(808,433
)
 
$
8,461

 
$ N/A
 
$

 
$ N/A

 
$

 
$
94,513

 
$

 
$

 
$

Fund I (1999) (K)
 
Apr-10
 
1,015,943

 
(2,793,118
)
 
55,485

 
1,832,660

 

 
N/A

 
10,463

 
334,604

 

 

 

Fund II (2002)
 
Feb-13
 
1,974,298

 
(3,266,588
)
 
154,136

 
1,446,426

 

 
N/A

 

 
287,985

 
33,720

 
3,352

 
2,145

Fund III (2004)
 
Jan-15
 
2,762,992

 
(1,451,329
)
 
2,297,125

 
985,462

 
1,547,025

 
561,563

 

 
66,903

 
66,903

 
66,903

 
45,108

Fund III Coinvestment (2004)
 
Jan-15
 
273,649

 
(165,926
)
 
129,859

 
22,136

 
190,057

 
167,921

 

 

 

 

 

Fund IV (2006)
 
Jan-17
 
3,639,561

 
(534,178
)
 
3,891,801

 
786,418

 
2,026,849

 
1,240,431

 

 

 

 

 

Fund IV Coinvestment (2006)
 
Jan-17
 
762,696

 
(119,953
)
 
626,263

 
(16,480
)
 
435,296

 
451,776

 

 

 

 

 

Fund V (2007)
 
Feb-18
 
4,103,714

 
(141,136
)
 
3,934,856

 
(27,722
)
 
1,701,518

 
1,729,240

 

 

 

 

 

Fund V Coinvestment (2007)
 
Feb-18
 
990,477

 
(146
)
 
636,162

 
(354,169
)
 
452,253

 
806,422

 

 

 

 

 

GAGACQ Fund (2004)
 
Closed
Nov-09
 
545,663

 
(595,401
)
 
 N/A

 
 N/A

 
 N/A

 
 N/A

 
 N/A

 
51,476

 
 N/A

 
 N/A

 
 N/A

FRID (2005)
 
Apr-15
 
1,220,229

 
(505,614
)
 
587,260

 
(127,355
)
 
745,645

 
873,000

 

 
16,447

 
16,447

 
16,447

 
10,041

FRIC (2006)
 
May-16
 
328,754

 
(17,460
)
 
242,146

 
(69,148
)
 
214,441

 
283,589

 

 

 

 

 

FICO (2006)
 
Jan-17
 
724,525

 
(5
)
 
(58,222
)
 
(782,742
)
 
437,872

 
1,220,614

 

 

 

 

 

FHIF (2006)
 
Jan-17
 
1,543,463

 
(63,169
)
 
2,240,908

 
760,614

 
846,177

 
85,563

 

 

 

 

 

FECI (2007)
 
Feb-18
 
982,779

 
(161
)
 
908,830

 
(73,788
)
 
532,949

 
606,737

 

 

 

 

 

 
 
 
 
  

 
  

 
  

 
  

 
  

 
  

 
$
10,463

 
$
851,928

 
$
117,070

 
$
86,702

 
$
57,294

Private Equity Funds in Investment Period
 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

WWTAI (2011)
 
Jun-24
 
$
155,395

 
$
(10,057
)
 
$
150,712

 
$
5,374

 
$
5,892

 
$
518

 
$

 
$

 
$

 
$

 
$

MSR Opportunities Fund IA (2012)
 
Aug-22
 
103,847

 

 
103,784

 
(63
)
 
3,100

 
3,163

 

 

 

 

 

MSR Opportunities Fund IB (2012)
 
Aug-22
 
25,153

 

 
25,093

 
(60
)
 
751

 
811

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$

 
$

 
$

 
$

 
$


Continued on next page.







12

Table of Contents
  
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2013
(dollars in tables in thousands, except share data)

 Fund (Vintage) (A)
 
 Maturity Date (B)
 
 Inception to Date
Capital Invested
 
 Inception to Date Distributions (C)
 
 Net Asset Value (“NAV”)
 
 NAV Surplus (Deficit) (D)
 
 Current Preferred Return Threshold (E)
 
 Gain to Cross Incentive Income Threshold (F)
 
 Undistributed Incentive Income (G)
 
 Distributed Incentive Income (H)
 
 Distributed Incentive Income Subject to Clawback (I)
 
 Gross Intrinsic Clawback (J)
 
 Net Intrinsic Clawback (J)
Credit PE Funds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long Dated Value Fund I (2005)
 
Apr-30
 
$
267,325

 
$
(65,049
)
 
$
281,614

 
$
79,338

 
$
113,138

 
$
33,800

 
$

 
$

 
$

 
$

 
$

Long Dated Value Fund II (2005)
 
Nov-30
 
274,280

 
(112,807
)
 
198,584

 
37,111

 
91,091

 
53,980

 

 
412

 

 

 

Long Dated Value Fund III (2007)
 
Feb-32
 
343,156

 
(237,150
)
 
223,983

 
117,977

 

 
N/A

 
18,611

 
3,452

 

 

 

LDVF Patent Fund (2007)
 
Nov-27
 
43,083

 
(9,032
)
 
53,753

 
19,702

 

 
N/A

 
1,307

 
461

 

 

 

Real Assets Fund (2007)
 
Jun-17
 
359,024

 
(274,197
)
 
192,724

 
107,897

 

 
N/A

 
13,200

 
3,641

 

 

 

Credit Opportunities Fund (2008)
 
Oct-20
 
5,451,915

 
(6,130,672
)
 
1,521,843

 
2,200,600

 

 
N/A

 
191,600

 
240,019

 
81,001

 

 

SIP Managed Account (2010)
 
Sep-20
 
11,000

 
(24,924
)
 
8,911

 
22,835

 

 
N/A

 
1,782

 
2,785

 

 

 

Japan Opportunity Fund (2009)
 
Jun-19
 
1,102,754

 
(900,242
)
 
606,802

 
404,290

 

 
N/A

 
44,507

 
40,579

 
10,567

 

 

 
 
 
 
  

 
  

 
  

 
  

 
  

 
  

 
$
271,007

 
$
291,349

 
$
91,568

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit PE Funds in Investment Period
 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

Credit Opportunities Fund II (2009)
 
Jul-22
 
$
2,136,394

 
$
(1,598,292
)
 
$
1,286,181

 
$
748,079

 
$

 
$ N/A
 
$
112,181

 
$
34,506

 
$

 
$

 
$

Credit Opportunities Fund III (2011)
 
Mar-24
 
1,099,673

 
(362,999
)
 
925,416

 
188,742

 

 
N/A

 
28,793

 
8,108

 
8,108

 

 

FCO Managed Accounts (2008-2012)
 
Oct-21 to Mar-27
 
3,177,080

 
(2,210,573
)
 
1,919,710

 
953,203

 

 
N/A

 
115,902

 
71,373

 
34,351

 

 

Japan Opportunity Fund II (Yen) (2011)
Dec-21
 
293,189

 
(57,332
)
 
262,037

 
26,180

 

 
N/A

 
2,873

 
1,580

 

 

 

Japan Opportunity Fund II (Dollar) (2011)
 
Dec-21
 
247,629

 
(27,164
)
 
239,185

 
18,720

 

 
N/A

 

 
2,547

 

 

 

Net Lease Fund I (2010)
 
Feb-20
 
148,537

 
(49,861
)
 
136,555

 
37,879

 

 
N/A

 
4,367

 
560

 
560

 

 

Global Opportunities Fund (2010)
 
Sep-20
 
233,286

 
(72,255
)
 
203,660

 
42,629

 

 
N/A

 
8,317

 

 

 

 

Life Settlements Fund (2010)
 
Dec-22
 
318,652

 
(94,254
)
 
238,230

 
13,832

 
43,667

 
29,835

 

 

 

 

 

Life Settlements Fund MA (2010)
 
Dec-22
 
26,187

 
(7,696
)
 
19,479

 
988

 
3,589

 
2,601

 

 

 

 

 

Real Estate Opportunities Fund (2011)
Sep-24
 
228,454

 
(71,653
)
 
177,465

 
20,664

 

 
N/A

 
1,175

 
629

 
170

 

 

Real Estate Opportunities REOC Fund (2011)
 
Oct-23
 
23,020

 
(7,466
)
 
19,220

 
3,666

 

 
N/A

 
729

 

 

 

 

  
 
  
 
  

 
  

 
  

 
  

 
  

 
  

 
$
274,337

 
$
119,303

 
$
43,189

 
$

 
$



13

Table of Contents
  
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2013
(dollars in tables in thousands, except share data)

 
 Incentive Income Eligible NAV (L)
 
 Gain to Cross Incentive Income Threshold (M)
 
 Percentage of Incentive Income Eligible NAV Above Incentive Income Threshold (N)
 
 Undistributed Incentive Income (O)
 
 Year to Date Incentive Income Crystallized (P)
Liquid Hedge Funds
  

 
  

 
  

 
  

 
  

Macro Funds (Q) (T)
  

 
  

 
  

 
  

 
  

Main fund investments
$
1,928,957

 
$
303

 
98.6
%
 
15,541

 
1,552

Sidepocket investments (R)
22,430

 
14,002

 
 N/A

 
454

 

Sidepocket investments - redeemers (S)
223,422

 
133,596

 
 N/A

 
4,385

 

Managed accounts
1,077,530

 
12

 
99.9
%
 
8,993

 
1,150

 
 
 
 
 
 
 
 
 
 
Asia Macro Funds (T)
  

 
  

 
  

 
  

 
  

Main fund investments
675,295

 

 
100.0
%
 
4,377

 
72

Managed accounts
106,022

 

 
100.0
%
 
619

 

 
 
 
 
 
 
 
 
 
 
Fortress Convex Asia Funds (T)
 
  

 
  

 
  

 
  

Main fund Investments
75,063

 
2,137

 
0.0
%
 

 

 
 
 
 
 
 
 
 
 
 
Fortress Partners Funds (T)
  

 
  

 
  

 
  

 
  

Main fund investments
69,348

 
29,856

 
0.1
%
 
1

 

Sidepocket investments (R)
138,465

 
22,259

 
 N/A

 
1,855

 

 
 
 
 
 
 
 
 
 
 
Credit Hedge Funds
  

 
  

 
  

 
  

 
  

Special Opportunities Funds (T)
 
  

 
  

 
  

 
  

Main fund investments
$
3,081,739

 
$

 
100.0
%
 
28,330

 

Sidepocket investments (R)
95,225

 
1,318

 
 N/A

 
4,287

 

Sidepocket investments - redeemers (S)
232,646

 
71,030

 
 N/A

 
3,602

 

Main fund investments (liquidating) (U)
1,419,708

 
127,710

 
94.7
%
 
92,362

 
2,980

Managed accounts
10,311

 
41,125

 
0.0
%
 

 

 
 
 
 
 
 
 
 
 
 
Worden Funds
  

 
  

 
  

 
  

 
  

Main fund investments
240,102

 
44

 
93.7
%
 
1,677